Mandatory reporting rules for certain types of transactions have been introduced by the UK, as required by the EU Directive on Administrative Cooperation, commonly called DAC6. The obligation to report will fall mainly on “intermediaries”, i.e. broadly advisers, but in certain circumstances, the obligation will fall on the businesses themselves, and companies will therefore need to make sure they are complying with any obligations that exist for them.
These rules came into force on 1 July 2020 and originally had quite tight reporting deadlines thereafter. The reporting deadlines were delayed and they will now come into effect from 1 January 2021 with potential reporting deadlines first arising at the end of January and February 2021. Businesses, therefore, have less than 4 months before reporting obligations might arise.
The rules are complex and this note sets out a summary of the rules and how businesses will need to act to ensure they are complying with their new obligations.
Background to the rules
The requirement to report certain transactions under the rules is intended to discourage taxpayers from implementing “aggressive tax arrangements”. In addition, the rules will provide an early warning system for tax authorities, allowing them to challenge arrangements and implement any change in the law required to block similar tax arrangements more quickly.
The rules set out:
- which arrangements need to be reported (a ‘reportable arrangement’);
- who needs to report the reportable arrangement;
- what information is to be reported;
- when the report needs to be made.
Which arrangements need to be reported?
The rules only apply to cross-border arrangements. In general terms, an arrangement will be cross-border where it is between businesses in different Member States, or between a business in one Member State and one in a third country. We expect the UK rules to be amended with effect from 1 January 2021, when the UK ceases to be deemed to be part of the EU, to include arrangements between a business in the UK and one in a third country, whether a Member State or not.
Arrangements are reportable where they are both cross-border and contain at least one of the defined hallmarks (broadly types of arrangements). Some of these hallmarks require there also to be an expectation of a tax advantage (called the main benefit test) that is outside the policy objective of that tax law.
There are no de minimis limits.
While the rules came into force on 1 July 2020, reportable transactions that have been implemented after 25 June 2018 must be reported.
Who needs to report the reportable arrangement?
As noted above, the primary reporting obligation is placed on an intermediary (broadly, an adviser or service provider). However, an intermediary in respect of the arrangement has no obligation to report where they can show they did not know, and could not reasonably have been expected to know, that the transaction in which they participated was a reportable cross-border transaction.
This is important as, if there is no intermediary that has an obligation to report (for example, where none of the intermediaries involved had sufficient knowledge of the arrangements), then the transaction must be reported by the taxpayer.
If an intermediary had an obligation to report but failed to do so, the reporting obligation does not, however, pass to the taxpayer (i.e. there is no requirement for the taxpayer to police the obligations of intermediaries). However, if the intermediary does not report it could be difficult for a taxpayer to assess whether it has correctly applied the rules given they are, at least in part, subjective, and hence whether they had an obligation to report.
Where there is no intermediary that has an obligation to report and the transaction has already been reported by another taxpayer (e.g. a counterparty to the transaction) there is no further obligation to report that transaction as long as the taxpayer has evidence that it has been reported and the other taxpayer managed the implementation of the transaction.
In practice, this means that taxpayers will need to review their cross-border transactions and confirm that all their reportable transactions have been reported by intermediaries or other taxpayers, to be sure they don’t need to make a report. In addition, it could be the case that a transaction has been partly reported by an intermediary, but not all the information has been reported (e.g. due to the intermediaries’ lack of visibility of the whole transaction). That may mean the taxpayer has an obligation to make a “top-up” report, and taxpayers will want to obtain from their intermediaries details of what has been reported.
In any event, we would expect all companies would want to know what transactions are being reported to HMRC by any “intermediary” it has engaged and to perhaps have sight of the draft report before it is made.
What information is to be reported?
Information reportable include the details of the parties, an overview of the transaction, the hallmark that causes the transaction to be reportable, the value of the transaction, the date of the first implementation, and tax rules that are relevant. The rules also set out to which tax authority the information should be sent. For companies resident in the UK who are required to make a report, it should be made to HMRC. HMRC is to open an online portal which will be used to receive reports.
When does the report need to be made?
The obligation to report comes into effect on 1 January 2021. For transactions that become reportable on or after that date the report needs to be made within 30 days of a defined date based on the date of the implementation of the transaction or when the intermediary first provided assistance. For reportable transactions where the obligation to report is triggered prior to 1 January 2021, the deadline will be the end of January 2021 except where the first step in the implementation took place between 25 June 2018 and 30 June 2020, for which the deadline is the end of February 2021.
The rules are complex and while HMRC has now issued guidance, the rules are very widely drawn and will require reports to be made for what is ostensibly benign non-tax advantaged transactions.
The time to start reporting under these rules is fast approaching so all businesses need to review their transactions implemented from June 2018 to ensure these transactions will be reported correctly.
We recommend that all businesses address these rules in advance of the January/February busy period.
In overview, we suggest all businesses:
- identify all cross border transactions implemented after 25 June 2018;
- consider and document whether any of those transactions are potentially reportable;
- liaise with any intermediaries and counterparties to understand if they are intending to report, and if so, the extent of their reporting; and
- consider whether the business has any further reporting obligations.
CWE can assist businesses in analysing whether transactions are potentially reportable, liaise with intermediaries on your behalf, and work with you to ensure the reporting obligations are satisfied.
CW Energy LLP